The sudden death of my friend J.'s husband a couple of days ago has got me thinking about life insurance again, and specifically, whether Marc and I each have enough coverage. As much I hate paying the premiums, thinking about how much worse J.'s situation would be if her husband didn't have adequate life insurance is making me wonder if we should add a policy.
But how do you decide how much life insurance is enough?
I remember struggling with this question after Alex was born. I knew Marc and I needed to purchase additional policies (we already had policies that we'd purchased after we bought our house) but I wasn't sure how much coverage to add. I used various online calculators, but I felt the same way about them as I do about retirement calculators: there are too many uncertain variables.
For instance, perhaps our biggest expense in the next 15 to 20 years will be paying for a private school education for the boys. (We might still send them to public school, but I have a lot to learn about the exemption system in LAUSD before we make a final decision.) The calculators take college expenses into account, but not private primary and secondary education expenses. That's not really a problem, since there's almost always a miscellaneous expense category, or the expense can be added into college expenses. The real problem is that it's hard to predict how much private school tuition will run 10 years from now. It's equally difficult to predict how high college expenses will be in 15 to 20 years.
If I assume that tuition will increase at 6% per year, a top private school will cost nearly $480,000 by the time Alex graduates from high school. A less expensive but still reputable private school will cost nearly $200,000. If Alex were to attend USC, SavingForCollege.com says it will cost $524,000 without aid. Attending UCLA will still cost over $250,000. So we're talking anywhere from $450,000 to $1 million just for educational expenses for each child. Probably. (I figure if the kids have lost a parent, the least we can do for everyone is eliminate these expenses as a source of stress and worry.) At this point, before our oldest has even started kindergarten, it's simply impossible to know which number is more realistic. For me, this kind of uncertainty is what makes life insurance calculations so difficult. (Ditto for retirement calculations.)
Another equally important and yet tenuous area of calculations is living expenses. How do you estimate your living expenses for 10 or 20 years from now? The calculators require you to input your current living expenses, and then use a formula to project expenses. But a family's expenses change through the years. Right now we pay for daycare and an occasional activity. But in a few years, we'll probably be paying for private school, sports teams participation and maybe lessons of some sort. I'm expecting our living expenses to rise considerably in approximately three years, when both boys are in school and participating in organized sports/activities, yet it's hard to predict exactly how much those things will cost. Or what if we decide to move? The mortgage, insurance, taxes and utilities would all change. But all I can do is guesstimate.
And that's really what it comes down to - your best guesses.
In the end, the best way to figure out how much life insurance you need is to come up with a range based on your best guesses. And then try to buy as much life insurance as you can afford.
One thing to note is that if your children are very young, a typical 20-year term policy may expire before your child's school years are over. You may want to consider a 25-year policy instead.
Life insurance, like wills, is one of those topics that's no fun to think about but absolutely necessary to have. Especially if you have family counting on you. Just think of what life would be like for them if you didn't have life insurance. That should be all the motivation you need to make sure you get those policies in place . . . before it's too late.